Chapter 3 (The Fundamental Economic Problem: Scarcity and Choice)

specialization and exchange

- _______ and _________, assisted by money, working together will increase the supply in an economy

comparative advantage

- a country producing goods less inefficiently than it produces other goods compared to another country

efficiency

- absence of waste of available resources and production of the maximum amount of output that its technology permits - if there is no way one can produce larger amounts of any output without using larger input amounts or giving up some quantity of another output - doesn't say which point on the production possibilities frontier is best, but says that below the frontier is not the best because there are wasted resources - no resources are wasted = "operating on the frontier"

principle of increasing costs

- as production of a good expands, the opportunity cost of producing another unit generally increases - based off the fact that most resources tend to be somewhat specialized

division of labor

- breaking up a task into a number of smaller, more specialized tasks so that each worker can become more adept at a particular job - raises efficiency and productivity - because people and businesses and nations have different abilities

satisficing

- decision maker settles on the first possibility they can "live with", which will yield results that are not too bad and seem fairly safe - may be willing to choose this course even if there are other better options but are unknown - its consequences must be compared with those of each of the other possible choices

market system

- form of economic organization in which resource allocation decision are left to individual producers and consumers acting in their own best interest without central direction

outputs

- goods and services an economy or firm produces

money cost vs opportunity cost

- if the market functions well, goods that have high opportunity costs will also have high money costs - however, goods that have low opportunity costs will also have low money costs

inputs/ resources

- instruments provided by nature or by people that are used to create outputs - raw material, labor, electricity and other materials - land, labor and capital - factors of production - tend to be specialized

free market

- many of society's important goals (like producing goods with maximum efficiency and minimum waste) can be achieved extraordinarily well by letting the market operate freely - cannot deal with every economic problem, bit most problems are best handled by market techniques

invisible hand

- people do what is best for themselves, so in a market system they promote the economic well-being of society as a whole

scarcity

- resources are always limited - what are all decisions constrained by?

production possibilities frontier

- shows the different combinations of various goods, any of which a producer can turn out given the available resources and existing technology. - any point on or inside the the frontier is attainable because it does not entail larger outputs than currently available resources permit - graphs to show what is or is not attainable given the available resources and existing technology

allocate spare resources

- society's decisions on how to divide up its scarce input resources among the outputs produced and among the different organizations that produce those outputs 1. figure out how to utilize its resources efficiently (reach the production possibilities frontier) 2. decide which of the possible combination of goods to produce (select one point on the production possibilities frontier) 3. how much of the total output of each of the goods to distribute to each person (in a sensible way)

specialization

- source of efficiency so fundamental because of its tremendous productivity gains

optimal choice

- the decision that best serves the objectives of the decision maker - the most desirable alternative among the possibilities permitted by the available resources - decisions that do better in achieving the decision maker's goal than any other possible choice - selected by explicit or implicit comparison with the possible alternative choices - selected by explicit or implicit comparison with the possible alternative choices - connotes neither approval nor disapproval of the objective itself

opportunity cost

- the value of the next best alternative that the decision forces the decision maker to forgo - decision to have more of one thing is a decision to have less of something else - make optimal decisions from among competing alternatives - slope in the production possibilities frontier graph

marginal analysis

- to determine the optimal decision - done by consumers, producers and sellers

role of markets

- when trading is carried out by means of exchange between money and goods/services, the output and price of every commodity will be driven towards level at which supply matches demand or comes very close to it

exchange

- works best where everyone agrees to use some common item (aka cash) for buying and selling things - without exchange, the productivity achieved by comparative advantage and division of labor would do little good to society because everyone would be lacking in what they cannot produce well

law of comparative advantage

see p.49